The U.K. pound is trading at 1.50 U.S. dollars per U.K. pound and purchasing power parity holds. The U.S. interest rate is 1 percent a year and the U.K. interest rate is 3 percent a year.

a. Calculate the U.S. interest rate differential.

b. What is the U.K. pound expected to be worth in terms of U.S. dollars one year from now?

c. Which country more likely has the lower inflation rate? How can you tell?